All Eyes on CPI

1.CPI and the Fed this Week. The November CPI report is released Tuesday and will likely determine how markets finish the year. A lower-than-expected CPI print could spark an equity rally into year-end, while persistent inflation and limited progress might lead most industries lower. We expect the market to remain in a trading range, in anticipation of CPI on Tuesday. 

Markets have rallied significantly in Q4 from the lows earlier in October – driven by value stocks – due in-part to seasonal tailwinds, better-than-expected earnings and the narrative supporting a slower pace of rate hikes. There are sectors that we think could outperform into year-end because of demand – particularly energy, materials and industrials. We remain overweight these groups.  

Chart 1: Index Performance Rebound in Q4¹ 

Last week, PPI, which represents selling prices for producers, continued to move lower on a month-over-month basis. But stepping back, the 7.4% year over year basis remains too high for the Fed and is the reason they remain hawkish with higher rate increases. 

Chart 2: Producer Price Index (PPI)² 

2. Fed Comments on Wednesday Will Impact Forward Rate Curve. Treasuries rallied though Wednesday, but sold off through the remainder of the week as the 10yr yield rose 16 bps off its lows. After briefly reaching -89 bps on Wednesday, the closely watched 3m/10yr spread became “less-inverted,” finishing the week at -72 bps as longer dated yields spiked relatively higher versus shorter-dated maturities. 

All eyes remain focused on this Wednesday’s FOMC rate hike decision, where policy rates are expected to rise 50 bps after four consecutive 75 bps hikes dating back to June. Chair Powell will likely face questions related to the deepening of the yield curve inversions, along with questions of a more resilient economy shown in last week’s ISM services index reading (56.5 vs est. 53.5). 

3. The Week Ahead. 

Earnings – Thursday: LEN, ADBE. Friday: DRI. 

Economics – Tuesday: CPI (November). Wednesday: FOMC Meeting. Thursday: Retail Sales (November), Industrial Production (November), Business Inventories (October). 

Stephanie Link: CNBC TV Schedule 

Return for Selected Indices³ 

Sources:

1. FactSet (chart). As of December 12, 2022.
2. Bureau of Labor Statistics (chart). As of December 12, 2022.
3. Bloomberg. As of December 4, 2022.

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